WORKSHOP TOWARDS A FREE TRADE AGREEMENT WITH JAPAN? ANNEX I. Dr JÜRGEN MATTHES. Cologne Institute for Economic Research.

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2 DIRECTORATE-GENERAL FOR EXTERNAL POLICIES OF THE UNION DIRECTORATE B POLICY DEPARTMENT WORKSHOP TOWARDS A FREE TRADE AGREEMENT WITH JAPAN? ANNEX I Dr JÜRGEN MATTHES Cologne Institute for Economic Research IW Köln, Germany EXPO/B/INTA/FWC/ /Lot7/30 October/ 2012 PE EN

3 Towards a Free Trade Agreement with Japan? This workshop was requested by the European Parliament's Committee on International Trade. AUTHORS: Dr Jürgen MATTHES, Cologne Institute for Economic Research (IW Köln), GERMANY ADMINISTRATOR RESPONSIBLE: Marika ARMANOVIČA Directorate-General for External Policies of the Union Policy Department WIB 06 M 91 rue Wiertz 60 B-1047 Brussels Editorial Assistant: Jakub PRZETACZNIK LINGUISTIC VERSIONS Original: EN ABOUT THE EDITOR Editorial closing date: 11 October 2012 European Union, 2012 Printed in Belgium ISBN: Doi: /21084 The Information Note is available on the Internet at If you are unable to download the information you require, please request a paper copy by poldep-expo@europarl.europa.eu DISCLAIMER Any opinions expressed in this document are the sole responsibility of the author and do not necessarily represent the official position of the European Parliament. Reproduction and translation, except for commercial purposes, are authorised, provided the source is acknowledged and provided the publisher is given prior notice and supplied with a copy of the publication.

4 An EU-Japan FTA - A view from Europe Jürgen Matthes Head of Department International Economic Order Workshop of the European Parliament: Towards a Free Trade Agreement with Japan? September 15, 2012 in Brussels

5 Free Trade as driver of economic growth IW Cologne strongly pro trade and pro multilateralism Openness for trade and investment are important drivers of growth and competiveness IW Cologne with some reservation concerning FTAs E.g. Spaghetti Bowl, Stumbling Blocs (Gentlemen s agreement: no FTAs btw. ICs) But: FTAs most realistic option as Doha in coma, plurilaterals difficult EU FTA Strategy ambitious EU-Japan a potential win-win-deal, but some caveats Pro: very large economy, prospect for ambitious FTA, shared values Con: slow economic growth, high relevance of NTMs Broad definition of NTMs 2

6 Agenda IW Cologne to provide a differentiated view that complements the relatively optimistic COM Impact Assessment Report (CIAR) Brevity of this presenations suggests a focus on critical aspects Brief Agenda Closed nature of Japanese economy Potential outcomes: brief evaluation of the results of the CIAR Contentious NTM reduction in Japan Recommendations 3

7 Closed nature of Japan s economy Japan relatively closed to Trade Investment 4

8 Limited openess to imports in Japan 5

9 Limited openess to inward FDI in Japan 6

10 Closed nature of Japan s economy Japan relatively closed to Trade Investment However, trade policy barriers not significantly higher than Triade Tariffs are lower Non tariff policy relatied barriers are not significantly higher 7

11 Closed nature of Japan s economy Japan EU USA Share of affected tariff lines* Share of affected imports* Overall trade restrictiveness due to NTMs (% of added trade costs)** Overall trade restrictiveness relation between NTMs and tariffs** Price gap for similar products (%)*** 61*** Fraser Institute Relevance of NTBs (scale 0-10, 10 most restrictive) CIAR: estimated total trade costs of NTMs (%) CIAR: estimated trade costs of NTMs (maximum actionable) Sources: * Source Swedish National Board of Trade, 2008, p ; ** Kee et al., 2006; ***Bradford/Lawrence, 2004, includes also non-policy barriers; CIAR: COM Impact Assessment Report, 2012, own compilation 8

12 Closed nature of Japan s economy Japan relatively closed to Trade Investment However, trade policy barriers not significantly higher than in Triade Tariffs are lower Non tariff policy relatied barriers are not significantly higher Closed nature of Japan s economy is a conundrum De facto barriers which are not policy related seem to be very important Strong preference for domestic products and partly also against FD Close and persistent networks on intermediate product level Cultural values, language, These non policy barriers can hardly be tackled by an FTA Recommendation: more research needed into nature of non-policy related NTMs 9

13 Evaluation of COM Impact Assessment (CIAR) Results: significant rise in GDP and exports, sector impact varies Lack of transparency about complimentary study (Black box) CGE models highly complex and their mechanic details not obvious Evaluation: How realistic and plausbile are the results? Comparison to existing studies: Considerable divergence of Qualitative results: Copenhagen Economics (2009) and CIAR (2012) more optimistic than other studies that expect no positive overall results for EU (but for Japan) Assumptions: CIAR with most up to date data, but also with most optimistic assumptions 10

14 Evaluation of COM Impact Assessment (CIAR) How realistic and relevant are the assumptions of the CIAR? Symmetric scenarios not realistic but results sometimes mentioned prominently Will tariffs be completely eliminated? Approx. 60% of overall increase of EU exports to Japan due to processed food and agricultural goods (in asymmetric conservative scenario) (Ambitious scenario: approx. 45%) Assumptions about NTM reductions appear relatively optimistic Ambitious scenario would require 50% reduction of NTMs in Japan This corresponds to a reduction by 5/6 of actionable NTMs in Japan Conservative scenario: reduction in all sectors about 1/3 of actionable NTM related costs In EU: 50 % NTM reduction in services - appears highly unrealistic 11

15 Evaluation of COM Impact Assessment (CIAR) How realistic are the assumptions of the CIAR? Assumptions about NTM reductions appear relatively optimistic Most sensitive assumption: 65 % of NTM reductions on MFN basis Accounts for 90 % of overall results (according to CIAR, p. 35) Is this realistic? Pro: Some regulatory reforms inevitably benefit all trading partners Con: Political economy of FTA negotiations often speaks against MFN-basis Demandeur is usually interested in preferential treatment Liberalising country is generally interested in keeping negotiation chips 12

16 Evaluation of COM Impact Assessment (CIAR) Final open question: How far are standard CGE models able to cope with the particularly closed nature of the Japanese economy? Recommendations: More information needed about sensitivity of assumptions: what-if-experiments About suitabilty of standard CGE models for Japan 13

17 Contentious NTM reduction in Japan Basic problem: Tariffs are usually reduced once and for all this is easily enforceable NTMs more problematic reductions are to monitor and enforce possibility of new NTMs in the future Clear Consensus among stakeholders: Japan should demonstrate will and ability to reduce NTMs prior to potential FTA negotiation to establish more trust among EU stakeholders 14

18 Contentious NTM reduction in Japan Evaluation of the Commission s strategic approach Roadmap for detailed NTM reduction (some until March 2013) Positive, but there is certain discontent among stakeholder with progress in Scoping Exercise Review Clause: Ending of negotiations after one year, if insufficient progress in NTM reductions in Japan Positive, but is this credible, because it would be a major diplomatic affront? Conditioning of EU tariff increases on Japanese NTM reductions Positive, but stated objective of Scoping Exercise: wide ranging tariff eliminations upon entry into force of FTA 15

19 Contentious NTM reduction in Japan Recommendations Negotiation mandate Clear definition of NTM reductions in Japan in all relevant areas Decision only when Japan clearly proved will and ability to deliver Review Clause Participation of Member States required in taking the decision Additional similar thresholds could be introduced (e.g. yearly basis) Change of decision structure could improve credibility: negotiations would end unless progress is deemed sufficient Conditioning of EU tariff reduction and Japanese NTM reduction Must be robust; EU tariff reductions have to held back Strong and resilient mechanism needed to tackle future NTMs 16

20 Thank you for your attention Workshop of the European Parliament: Towards a Free Trade Agreement with Japan? September 15, 2012 in Brussels

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